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Weekly Market Focus 17 September 2018

Markets

WEEKLY FOCUS -  A long cycle, but no sign of a recession yet                                      17 September 2018
 

 

 

This is one of the longest economic growth cycle in history and the anniversary of the Lehman brothers’ collapse last week, reignited discussions about whether the economic expansion is coming to an end. The discussion is important as the chart above illustrates the correlation between the S&P500 equity index and Retail and food service sales which is the heaviest component of GDP in the US. To be more specific, the correlation between the two data series over the indicated period is 98%, implying that as retail sales grows, so does the equity index. However, volatility is an undeniable feature of markets and the dip in the red line in 2014 – 2015 is a good illustration of this point: during this period, oil prices dipped on account of a supply glut but more importantly, year on year comparison of growth figures plateaued because the base effects of the previous years were steeper. The diversion with retail sales during this period was transitory as the index regained ground again.

 

So how do we determine whether a cycle is ending or whether the equity index is just suffering a dip when it happens? One method is to analyse measures of demand over multiple cycles to determine the time horizons between the point they peak and the start of a recession. A number of such data points indicate that while growth may be below the highs of previous cycles, there is not yet evidence which is supportive of a bear market for another 12 month excluding a black Swan event. On the contrary, analysts’ forecast from Factset are for earnings to grow double digit next year.

  

The preliminary estimates of Purchasing Managers’ Index - Manufacturing which has a high correlation to GDP growth will be released this Friday and should reinforce the view that the dip which happened in Europe since the start of the year is fading. This is another positive sign for risk assets.

 

 

Value

Week

YTD

Equity Indices

 

 

 

S&P500

2,905

1.16%

8.65%

S. Africa

3,384

-1.15%

-10.73%

FTSE100

7,304

0.36%

-4.99%

DAX

12,124

1.38%

-6.14%

CAC40

5,353

1.91%

0.75%

Swiss Mkt.

8,970

1.43%

-4.83%

FTSE MIB

20,885

2.14%

-4.43%

Shanghai Comp

2,682

-0.76%

-18.91%

BSE Sensex

38,091

-0.78%

11.84%

Nikkei

23,102

3.53%

1.48%

Major currencies

 

 

 

USDZAR

14.93

-1.99%

20.71%

EURUSD

1.16

0.67%

-3.07%

GBPUSD

1.31

1.11%

-3.31%

USDCHF

0.97

-0.19%

-0.71%

EURCHF

1.13

0.48%

-3.74%

USDJPY

112.06

0.88%

-0.56%

EURGBP

0.89

-0.44%

0.26%

USDAUD

1.40

-0.64%

9.08%

Dollar Index

94.92

-0.43%

3.36%

 Commodities 

 

 

 

Brent

78.09

1.64%

16.78%

WTI Oil

68.99

1.83%

14.18%

Copper

2.63

0.92%

-19.91%

Aluminum

2,036.75

-0.39%

-10.49%

Platinum

794.60

1.62%

-14.98%

Sugar

11.16

1.36%

-26.39%

Corn

337.00

-4.87%

-3.92%

Coffee

95.45

-6.88%

-24.37%

Gold

1,198.30

0.39%

-8.48%

Cotton

81.84

-0.20%

4.29%

 Sovereign Yields

 

 

 

US10Y

3.00

0.06

0.59

UK10Y

1.53

0.07

0.34

Germany10Y

0.45

0.05

0.02

 
Contact: DBN +27 ( 0 ) 31 566 3365 | CPT +27 ( 0 ) 21 851 0920 | JHB +27 ( 0 ) 11 017 7230 | Email:enquiries@pegasuswm.com
Disclaimer: The research report has been prepared for information purposes and does not constitute an offer. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and the company accepts no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this report.
 

 



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